FTC Approves Hertz’s Acquisition of Dollar Thrifty
On November 15, 2012, the FTC approved Hertz Global Holdings, Inc.’s (“Hertz”) acquisition to acquire Dollar Thrifty Automotive Group inc. (“Dollar Thrifty”). The transaction was cleared after Hertz agreed to sell its Advantage Rent A Car (“Advantage”) business including 43 on-airport locations as well as 29 Dollar Thrifty on-airport locations to remedy alleged competitive harm at 72 on-airport locations.
After an FTC investigation that was on and off again for over two years, the FTC finally allowed Hertz to buy Dollar Thrifty. In April of 2010, Hertz offered Dollar Thrifty $41 per share. Avis Budget Group, Inc. (“Avis”), which operates the Avis and Budget brands, jumped into the fray and started a bidding war. Shortly after, the FTC issued second requests to both Hertz and Avis and began investigating the anticompetitive effects of both transactions. Hertz raised its bid to over $50 per share in late September 2010, but Dollar Thrifty shareholders rejected Hertz in favor of Avis’ higher bid. While Avis and Dollar Thrifty still had not inked a deal, the FTC continued to investigate the Avis/Dollar Thrifty combination. Avis and Dollar Thrifty had significant overlap in their airport businesses, but Avis would not commence an exchange offer until it could get comfortable with the antitrust review. In May of 2011, Hertz reentered the bidding for Dollar Thrifty with a bid for $72 per share. In August of 2011, the FTC issued another second request to Hertz for its new bid. In September of 2011, Avis walked away. Without a deal in place, Hertz continued to work with the FTC staff. On August 26, 2012, Hertz finally inked a deal with Dollar Thrifty for $87.50 per share along with an agreement to divest Advantage including 62 airport locations, some of which were operated by Dollar Thrifty, to Franchise Services of North America, Inc. (“FSNA”) and Macquarie Capital USA Inc. (“Macquarie”).
Within two and a half months of announcement of the transaction, the FTC approves a settlement agreement that allows Hertz to complete its transaction. The only difference in the consent package that was offered by Hertz at the announcement of the deal is a requirement to divest an additional 13 airport locations.
The FTC alleges that Hertz and Dollar Thrifty are close competitors in U.S. airport car rental markets. On a national level, Hertz’s and Dollar Thrifty’s combined market share of all airport car rentals is approximately 38 percent. The FTC alleges that Hertz, Dollar Thrifty, Avis, and Enterprise Holdings, Inc. (which operates the National, Alamo and Enterprise brands), are the only rental car providers with a national presence, large fleets, well-known brands, and the most convenient airport locations. According to the FTC allegations, these four firms account for approximately 98 percent of total airport car rentals in the United States.
However, the FTC was not concerned about the overall combined market share at airports rather the FTC alleged that competition at particular airports would be harmed.
By reducing the number of major competitors from four to three, the FTC alleges that competition would be reduced at 72 airports in the United States by making coordinated interaction among the remaining three national car rental firms more likely.
The FTC also alleges that the proposed acquisition would eliminate head-to-head competition between Hertz and Dollar Thrifty at these 72 airports. According to the FTC, Dollar Thrifty constrains Hertz’s ability to raise prices for car rentals. Without any conditions, the combined firm would be able to increase prices. This is an interesting allegation given that Avis and Enterprise brands are likely in these same airports.
In addition, the FTC alleges that entry into the car rental business at airports is difficult. In order to compete effectively across geographic markets, a new entrant must have concession contracts in place that allow it to operate at each individual airport, establish brand identity and reputation, and be of a size sufficient to achieve economies of scale. Apparently, existing fringe firms have had difficulty expanding beyond their regional footprints because of these entry barriers.
Hertz agreed to sell its Advantage business as well as 16 Dollar Thrifty on-airport locations to FSNA. The sale of the Advantage business must completed within fifteen days of the closing. In addition to Hertz's initial offer, Hertz agreed to sell another 13 Dollar Thrifty on-airport locations to FSNA/Macquarie or another FTC approved buyer. The buyer must be submitted to the FTC within 60 days of the closing of the acquisition. The FTC appointed an interim monitor to oversee the sale of the assets.
The settlement also requires Hertz to provide FSNA/Macquarie with access to an initial rental car fleet and related support until FSNA/Macquarie can independently obtain its own fleet of cars.
Approval of Settlement
The FTC approved the settlement by a 4-1 vote. The FTC believes that requiring Hertz to sell its Advantage business, as well as 29 Dollar Thrifty non-airport locations resolves the loss of competition and eliminates the likelihood of coordinated interaction among the remaining competitors. The FTC also believes that the settlement will enable Advantage to become the fourth-largest car rental competitor in the United States, and allows it to compete effectively and immediately at airports. Moreover, the FTC explains that FSNA/Macquarie possesses the resources and capability to replace Dollar Thrifty as an effective competitor. The FTC further explains that FSNA has the technology infrastructure, relationships with online travel agencies, and experience needed to run a national airport car rental company.
While four commissioners approved the settlement, Commissioner J. Thomas Rosch dissented. Commission Rosch dissented because he believes the settlement does not resolve competitive concerns at several dozen other airports. He indicated that he would have “voted to challenge the transaction because of the significant risk of post-merger coordinated interaction among the remaining competitors.”
This enforcement action is noteworthy for several reasons. First, the on again and off again investigation of the car rental industry lasted about 30 months. Reportedly, the FTC issued three second requests to Hertz over that time period. Obviously, this is a unique circumstance that required the FTC to continue to seek the most recent data and information available from the parties. Even though the FTC was very familiar with the industry and the Hertz/Dollar Thrifty overlaps in airport locations, the staff still needed additional information to complete its review after the acquisition was announced in August of 2012. Second, once a deal was actually announced and signed, the antitrust review was completed within two and a half months. While these circumstances were unusual, negotiating a consent package to resolve anticompetitive effects of a $2.3 billion acquisition in two and a half months is extremely fast. This demonstrates that the FTC is willing to work with merging parties in unique situations. Third, the FTC continues to approve 4-3 mergers without a strong consent package that remedies competitive concerns raised by the acquisition. While only Commissioner Rosch dissents, he believes that the consent decree does not resolve concerns at several dozen other airports. He suggests that the FTC did not seek enough divestitures, which seems to make sense if there is actually a coordinated effects problem that exists throughout airports in the United States. In addition, Hertz was allowed to in effect trade up by purchasing Dollar Thrifty, a much more significant brand than Advantage. Fourth, the consent decree requires an upfront buyer for the Advantage business and 16 Dollar Thrifty airport locations, but does not require an upfront buyer for 13 other Dollar Thrifty airport locations. Those sales will be made post-consummation. We understand that given the timing constraints of the investigation that the additional divestitures were added in the late stages of the FTC review. This approach indicates that the FTC can be very flexible in negotiating settlements. The FTC allows for FNSA or another potential buyer to negotiate the acquisition of 13 additional airport locations within sixty days of the closing. Rather than requiring the additional assets to be sold to FNSA, which would strengthen the viability of the new entrant, this provision allows Hertz to sell the 13 airport locations to the highest bidder so the assets are not guaranteed to go to FNSA. Fifth, continuing a trend of the antitrust agencies becoming more flexible in resolving competition problems and coming up with a remedy that works, the consent decree includes both structural and behavioral remedies. This consent decree includes a behavioral remedy that requires Hertz to provide FNSA with a fleet of rental cars and related support until FNSA can do it independently.